The Impact of Tax Governance on a Business Sale

There are many benefits to good tax governance. Having good tax governance in place gives senior management the confidence that a company or group’s tax affairs are being dealt with effectively in accordance with the direction the board set out. It also enables a good relationship with HMRC and a low-risk rating, reducing the frequency and scope of enquiries, and also gives confidence to other stakeholders. Good tax governance also makes it easier for the finance and tax functions to operate smoothly, ensuring the organisation is on top of tax risks and ensuring no surprises. Essentially it is all about confidence and trust.

Confidence and trust are more important than ever when a company is going through a sale. A Tax Due Diligence process is an inevitable part of the sale procedure, and advisors for the buyer will be crawling all over the tax affairs of the company looking for errors and issues.

Buying a business is all about having the confidence to be comfortable investing, as well as knowing what you’re getting yourself into. If the tax governance is poor or non-existent, it calls into question how well the rest of the business is run, whether a business is worth as much as initial figures suggest or even whether the risks attached make it a worthwhile investment at all.

The first thing a Tax Due Diligence process will look at when it comes to tax governance is whether a company is complying with all of its legal obligations. These will depend on the size of the company or group being acquired, but one area that is applicable to all companies large and small is the requirements around Corporate Criminal Offences (CCO). Questions will be asked about whether the company has a CCO policy in place, is it embedded throughout the business, what’s the supplier on boarding process like when it comes to CCO, and have staff and associates had training on CCO?

Other areas that may be relevant depending on the size of the company/group include:

• Tax Strategy – If required to do so, does the company/group have a Tax Strategy document published on its external website, and is this regularly updated?
• Senior Accounting Officer (SAO) – Is the company/group up to date with its SAO obligations? Has the SAO certificate been filed on time each year, and did the SAO file an unqualified certificate – if so, does it have the supporting evidence to back this up? If a qualified certificate was submitted, what were the grounds for the certificate being qualified?
• Business Risk Review + (BRR+) – When did HMRC last undertake a BRR+, and what was the outcome of the review? If recommendations were made by HMRC to improve processes, have these been followed up on and implemented?

All of these are of interest to a buyer and are a first port of call when it comes to a review of tax governance. A good Tax Due Dilligence process will also look at the wider context around tax governance and tax risk management too. Questions that may be asked include:

• What is the Tax Strategy of the business, if there is one, does it tell the reader about the business’s approach to tax?
• Does the business have a good Tax Control Framework in place to manage risks, and is there a regular tax risk review undertaken?